What Is a Pip in Forex? Using Pips
Content
What is Pip In Forex Trading? Pip Explained
How Do You Calculate The Value Of A Pip?
An Example Of A Pip In Trading
What Does Pip Stand For ?
CFD Pips
What is a Pip in Forex Trading? Pips Explained
What is a pip in Forex trading? A Forex pip is an incremental price movement, with a specific value dependent on the market in question. Put simply, it is a standard unit for measuring how much an exchange rate has changed in value.
Originally, a Forex pip was effectively the smallest increment in which an FX price would move, although with the advent of more precise methods of pricing, this original definition of a Forex pip no longer holds true.
Traditionally, FX prices were quoted to a set number of decimal places – most commonly four – and, originally, a Forex pip was a one-point movement in the final decimal place quoted.
The meaning of pips in Forex has changed slightly. Many brokers now quote Forex prices to an extra decimal place; however, this means that a pip in Forex is frequently no longer the final decimal place within a quote. It remains a standardised value across all brokers and platforms, making it very useful as a measure that allows traders to always communicate in the same terms without confusion.
Without such a specific unit of the Forex pip, there would be a risk of comparing apples to oranges, when talking in generic terms such as points or ticks. This is a basic answer to the question, ‘what are pips in Forex?’.
How Do You Calculate the Value of a Pip?
The next step in answering the question, ‘what are pips in Forex?’ and understanding the meaning of pips, is to understand how to calculate Forex pips. For most currency pairs, one Forex pip is a movement in the fourth decimal place. The most notable exceptions are those pips in Forex pairs involving the Japanese Yen. For pairs involving the JPY, one Forex pip is a movement in the second decimal place. The Forex pip points table below shows Forex pips rates for some common currency pairs.
To further understand the meaning of Forex pips, let’s look at an example of a Forex pip. Multiplying your position size by one pip will answer the question of how much a pip is worth. For example, let’s say that you want to trade the EUR/USD currency pair, and you decide to purchase one lot.
One lot is worth 100,000 EUR. Here, one Forex pip is 0.0001 for EUR/USD. The currency value of one Forex pip for one lot is therefore 100,000 x 0.0001 = $10. Hence, we can calculate that the profit or loss will be $10 per pip for this forex pair.
Here’s a simple example of a pip in Forex to illustrate the pips meaning:
Let’s say you buy the EUR/USD at 1.16650, and later close your position by selling one lot at 1.16660. The difference between the two is:1.16660 – 1.16650 = 0.00010
In other words, the difference is 1 Forex pip. You will have made a profit of $10. If we work through these sample numbers from a different angle, we can further illustrate the answer to, ‘what is a pip in Forex trading?’.
An Example of a Forex Pip in Trading
Let’s say that you opened your position at 1.16650, and you bought one contract. This is equivalent to buying 100,000 EUR. Notionally, you are selling dollars to purchase Euros. The value of the dollars that you are notionally selling is naturally dictated by the exchange rate.
For example:
EUR 100,000 x 1.16650 : USD/EUR = USD 116,650
You closed your position by selling one contract at 1.16660. Notionally, you are now selling the Euros and buying the Dollars.
EUR 100,000 x 1.16660 : USD/EUR = USD 116,660
That means that you originally sold $166,650, and ended up with $166,660, for a profit of $10. From this, we can see that a one-pip movement in your favour made you $10.
Are you still struggling with the answer to the question, ‘what are pips in Forex?’ Don’t worry. It may feel complicated at first, but this is natural. In fact, this trading Forex pips value is consistent across all FX pairs that are quoted to four decimal places.
A movement of one Forex pip in the exchange rate is worth 10 units of the quote currency (i.e. the second-named currency) if you are dealing in a size of one lot (which is always 100,000 units of the base currency – the first-named currency).
A move of 10 pips in Forex is worth 100 units of the quote currency. A move of 100 pips in Forex is worth 1,000 units of the quote currency, and so on.
What About Currencies That Are Not Quoted to Four Decimal Places?
The most notable currency here is the Japanese Yen. Currency pairs involving the yen were traditionally quoted to two decimal places, and Forex pips for such pairs are therefore governed by the second decimal place.
So, let’s take a look at how Forex pips are calculated with the USD/JPY currency pair: If you sell one lot of the USD/JPY, a downward move of one FX pip in the price will enable you to earn 1,000 yen.
Let’s work through an example of such a pip in Forex to see why:
The USD/JPY Currency Forex Pip Example
Suppose that you sell two lots of the USD/JPY currency pair at 113.607. One lot of the USD/JPY is worth 100,000 USD. You are therefore selling 2 x 100,000 USD = USD 200,000 in order to purchase: 2 x 100,000 x 113.607 = 22,721,400 JPY.
Let’s say the price moves against you and you decide to cut your losses. You close out at 114.107. One Forex pip for the USD/JPY is a movement in the second decimal place. The price has moved against you by 0.50, or 50 pips.
You proceeded to close your position by purchasing 2 lots of the USD/JPY at 114.107. To buy back $200,000 of USD at this rate costs: 2 x 100,000 x 114.107 = JPY 22,821,400.
This is 100,000 JPY more than your original sale of Dollars gave you, so you have a shortfall of 100,000 JPY.
Losing 100,000 JPY for a 50-pip movement means that for each Forex pip you lost 100,000/50 = 2,000 JPY. Since you sold 2 lots, this is a pip value of 1,000 per lot.
If your account is denominated in a currency that is different to the quote currency, it will affect the Forex pip value. You can use our Trading Calculator to calculate forex pip values and profits with ease. This information above covers most of the basics of the answer to, ‘what is a pip in Forex trading?’.
What Does Pip in Forex Stand For?
Now that we’ve answered the question, ‘what is a pip in Forex?’, let’s answer another question, ‘what is the meaning of pip?’. Some say that the “pip” meaning in Forex originally stemmed from Percentage-In-Point, but this may be a case of false etymology. Others claim it stands for Price Interest Point. Whatever the meaning of pip, they allow currency traders to discuss small changes in exchange rates in readily understandable terms.
This is similar to how its cousin – the basis point (or bip) – allows easier discussion of small changes in interest rates. This provides us with the most basic answer to what is a pip in currency trading – it is much easier to say ”cable has risen 55 pips”, for example, than to say ”it’s increased by 0.0055”.
CFD Pips in Forex
So far, we’ve focused on the question, ‘what are pips in Forex?’. If you are interested in trading shares, you may be wondering if there is such a thing as a pip in trading stocks. There is no term ‘pips’ in trading shares because this market uses other terms for communicating price changes: ‘pence’ and ‘cents’.
For example, the image below shows an order ticket for IBM:
IBM order ticket – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Connect Financials (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
The whole numbers in the quote represent the price in USD and the decimal numbers represent cents. This is readily understood and familiar for most traders.
Therefore, there is no need to introduce any other terms, such as pips in Forex, though sometimes market lingo may include a generic term such as ‘tick’, to represent a movement of the smallest increment possible – in this case, one cent. This is similar to a pip in Forex.
Whatever you are planning to trade, whether it’s CFDs in Forex, or CFDs on shares, you will want to be using the best trading platform available. This is why you should try out using the MetaTrader Supreme Edition (MTSE) plugin for MetaTrader 4 and MetaTrader 5. MTSE is a cutting-edge plugin that offers a much wider selection of indicators and trading tools compared to the standard versions.
Final Words
Now that you understand the pip meaning and have an answer to the question of ‘what a pip is in Forex trading?’, we wish you luck in your Forex journey!
Understanding this unit of measurement for changes in FX rates is an essential step on the path to becoming a proficient trader. If you enjoyed this discussion about the meaning of pips in Forex and what are pips in Forex, why not take a look at our article on Risk Management
